Insurance policies can be complicated. Homeowners often believe that they’re insured for things they aren’t, only to realize they still needed it when it’s too late. Other elements of insurance may be common across policies, but are still worth looking into.

One commonly misunderstood example is liability insurance: this is essentially coverage for lawsuits that you may face due to an accident or negligence, or if a suit is simply brought against you. There are several ways this might happen, including someone injuring themselves on their property (such as slipping on an icy staircase) or damage caused to a neighbor’s home when a house fire spread from your house to theirs.

Home Fire Insurance vs. Liability Insurance

The important difference between Home Fire Insurance vs. Liability Insurance is that the former covers damages to your own home after a fire (Structure / Dwelling, Loss of Use / Additional Living Expenses, and Contents), while the latter covers damages caused to someone else as a result of an accident on your property, or by your own actions or negligence.

How Liability Works

Liability means that you are at fault for damages, or that your property is the source of damages to another’s person or property. For example, a fire that starts due tothe negligent act (such as careless smoking or leaving propane on) and then spreads outside your property. Fires can spread quickly, and before the fire department arrives to douse the flames, they may spread not only onto a neighbor’s property, but into their home. Accidents can happen very quickly, for example, if a half-empty tank of propane leaning against your home catches fire, the explosion can cause flames to spread all the way to a neighboring home.

Your own home insurance will cover the damage done to your own home and property. This includes the costs of cleaning up smoke and water damage, removing soot, replacing or salvaging lost personal belongings, and structural repairs such as your roof, windows, floors, walls, etc.

The neighbor’s home insurance would also likely pay the neighbor to repair the damage to their own home and get them back into their home sooner.However, at some point either the neighbors or their insurer could pursue you to recover the costs they paid out.

Why You Need to Liability Insurance

When homeowners have liability insurance, the two insurance companies typically work out the process between themselves, leaving the homeowners out of it while they’re busy repairing the homes. In the this scenario, the neighbor’s insurer would look to subrogate their costs from your insurance company. Subrogation means pursuing a third party for a loss caused by their insured. In other words, the neighbor’s insurer would want your carrier to compensate them for everything they paid out to the neighbor. Subrogation means the carrier takes on the legal standing of the policyholder to pursue damages.

The benefit of subrogation is that the policyholder does not have the right to both file a claim with their insurer and seek those same damages from the party responsible for the losses. In the example above, the neighbor could not receive $300,0000.00 compensation from their insurer and bring a lawsuit against you for $300,000.00. They only get the $300,000.00 that they’re entitled to from one person.

Liability insurance is often part of home insurance policies, but it pays to double check. The more you understand about your insurance, the better protected you’ll be.